Do Rising Interest Rates Affect Commercial Real Estate? by Kevin Sanz, CCIM, MSIRE

Posted on April 29, 2021

With current interest rates at historic lows due, in part, to the impact of the COVID-19 pandemic, the reality is that rates can only go higher from here.

In broad economic terms, rising rates make borrowing more expensive and have the potential to reduce investors’ returns on their investments. Within the realm of commercial real estate, there is a correlation between interest rates and cap rates. However, any fears that higher rates could cause property values to decline are unfounded. Rather, rising rates signal a strengthening economy and increased demand for commercial space, which, in turn, can command higher rents to bolster operating income and counterbalance any potential decrease in property value that may occur due to interest rate hikes.

The one area of CRE for which this rule does not apply is real estate investment trusts (REITs), which not only rely on a lot of debt to operate but also require 90 percent of taxable income to be paid back to investors in the form of regular dividends.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.